Scales of justice
Keystone’s top line growth is largely driven by recruiting more lawyers © Kestrelweb|Dreamstime

Promising workers “freedom, flexibility and autonomy” is in fashion. It was less common when adopted as the founding principle of Aim-listed Keystone Law, a “virtual” firm that provides support and infrastructure to self-employed lawyers working remotely. On Thursday, the efficiency of Keystone’s model was underscored by a strong set of interim results. Its shares, already nearly five times the price at which they joined the market in 2017, jumped by a tenth.

Keystone is one of a growing number of law firms that have gone public. Next up is Mishcon de Reya, set to become the biggest after partners voted for a London listing. The flotations reflect a need for more capital to invest in technology and expansion. Firms such as DWF, Knights and Gateley have used listings as a springboard for acquisitions.

Keystone’s reliance on organic expansion makes it an exception. Top line growth, averaging 21 per cent a year over the past five years, is largely driven by recruiting more lawyers. The relatively small increase in property and management overheads required to support that growth has helped operating profit margins nearly double to 12.2 per cent since 2017.

Fee earners have an incentive to issue and collect on bills quickly. They only get their 75 per cent share after the client has paid Keystone. Although trade debtor days rose from 30 to 34 in the first half, they remain low by industry standards.

At 40 times forward earnings, Keystone’s shares trade at more than twice the valuations of aforementioned rivals including RBG. That reflects its strong cash flow and capital light business model. Its cash conversion rate averages 90 per cent over the long term.

To justify the premium, it will need to keep up the pace of recruitment. That will depend on lawyers being attracted to what is described as a “free-range” lifestyle. One risk is that flexible working practices offered by rival conventional law firms will blunt its appeal. The investment case for Keystone is a bet on a return to presenteeism elsewhere.

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